Recent AAT decision – Confirming the ATO’s powers to determine the eligibility of R&D Tax Incentive activities

In its latest R&D Tax Incentive decision (GQHC v Commissioner of Taxation [2024] AATA 409) , the Administrative Appeals Tribunal (AAT) affirmed the position that the ATO has the power to assess and determine the eligibility of R&D activities per the legislative requirements within the Income Tax Assessment Act (ITAA) 1997 (ITAA 1997).

The decision is significant as previously a widely held view was that the ATO’s role in administering the R&D Tax Incentive program was restricted to assessing the eligibility of R&D expenditure with Industry, Innovation and Science Australia (AusIndustry) holding sole responsibility for determining the eligibility of R&D activities. However, this position had not been previously tested and this AAT decision provides the first clear determination of the powers and responsibilities of the two regulators of the R&D Tax Incentive program.

Background

The applicant in this case is a vertically integrated chicken growing business that operates rearing and egg laying farms. For several years, the company had self-assessed and claimed an R&D tax offset for costs incurred on R&D activities including expenditure incurred to acquire day old chickens and poultry feed. 

The dispute arose as a result of the business identifying that, in its view, it had calculated an incorrect amount of feedstock allowance and was entitled to a greater R&D tax entitlement. GQHC sought to amend its 2012 income tax return (ITR) to reflect this position which prompted the Commissioner to review the company’s eligibility to R&D tax offsets for the 2012-2014 income years.  

Ultimately, the Commissioner found that the R&D activities did not constitute R&D activities as defined in Division 355 of the ITAA 1997. The Commissioner also determined that the company had incorrectly calculated feedstock expenditure and the feedstock adjustment amount. 

GQHC applied to the AAT to challenge the Commissioner’s determinations with arguments focusing on the eligibility of activities and costs for the 2013 year. As part of these arguments, GQHC contended that the Commissioner does not have the jurisdiction to decide the eligibility of R&D activities as defined Division 355 of the ITAA 1997. 

The AAT agreed with the decision of the Commissioner, confirming that the core R&D activities in question were ineligible and affirming the authority of the Commissioner (and the ATO) to assess the eligibility of R&D activities in the absence of a formal Finding by AusIndustry. 

Key Takeaways

Some important takeaways from this AAT decision: 

• The decision followed non-binding comments made in the 2021 Full Federal Court decision (Commissioner of Taxation v Auctus Resources) supporting the position that there are circumstances in which the ATO’s powers could extend to assessing the eligibility of R&D activities. As such, the decision clarified a position that had been alluded to in a recent judgement.

• A trigger for the dispute with the ATO was the company seeking to increase its R&D tax claim via an amendment to include reclassify feedstock expenditure as ‘other R&D expenditure’. This resulted in the ATO undertaking steps to ensure that the R&D activities were eligible in order to approve the amendment.

• Both the relevant governing bodies (the ATO and AusIndustry) have provided clarification of their view of the impact of this decision, issuing statements to reassure taxpayers that there is no intention to change how the R&D Tax Incentive is administered. AusIndustry provided this helpful commentary in the April 2024 issue of its ‘R&D Tax Incentive Insider’ publication:
  “[we] will continue to assess the eligibility of R&D activities as they apply under legislation, and the ATO won’t assess the eligibility of activities unless put in a position where they must.”

• The AAT decision, and the preceding Full Federal Court judgement on which the AAT relied (Auctus Resources) were very clear that the ATO would be bound by a Finding issued by AusIndustry affirming the eligibility of R&D activities. Whilst there are many considerations that impact whether a Finding is warranted, taxpayers now have further reason to consider securing a Finding from AusIndustry if they require certainty on the eligibility of their R&D activities. 

The case also provided a detailed analysis of what constitutes feedstock expenditure for R&D Tax Incentive claims, as well as a reminder of the importance of documentation and an insight on the role of technical matter experts in determining the eligibility of R&D activities. 

Whilst the decision blurs the lines of responsibility of the regulators of the R&D Tax Incentive program, taxpayers should not expect any immediate changes in how the program is administered based on comments in response to the decision from both the ATO and AusIndustry. In short, be alert not alarmed.